By Yan “Anthea” Zhang, Zhuo Chen and Yuandi Wang
Patents are important assets to many firms. Firms can not only use patents to protect their new inventions, but also can secure loans using patents as collaterals. According to Mann (2018), around 40% of U.S. patenting firms have used their patents as collaterals at some point. We examined patent collateralization in the U.S. semiconductor industry, using data on 107,180 U.S. semiconductor patents owned by 436 U.S. firms that have patented intensively in the semiconductor industry. We found that 14.4% of these semiconductor patents have been collateralized by the patent holder firms at some point. These data demonstrate the prevalence of patent collateralization in the debt market.
A widely accepted belief is that patent collateralization is mainly for small firms since these firms lack financial resources and they do not have sufficient tangible assets to be used as collaterals. We found that this is not the case. Indeed, patent collateralization has been widely adopted by small and large firms and anything in between, at least in the semiconductor industry. Table 1 lists the top ten lenders and the top ten borrowers in the semiconductor industry, based upon our study sample. As shown in the table, large and well-known companies, such as Freescale Semiconductor and Alcatel-Lucent, are active and important participants in patent collateralization.
Table 1. Top 10 lenders and top 10 borrowers
|Names of lenders||No. of pledged patents||Names of borrowers||No. of pledged patents|
|Citibank||2,854||Freescale Semiconductor Inc.||1,707|
|Deutsche Bank Ag||2,387||Alcatel-Lucent||1,660|
|Morgan Stanley||1,850||LSI Corporation||968|
|Credit Suisse Ag||1,647||Agere Systems Inc.||742|
|Bank of America||1,436||STATS ChipPAC Ltd.||645|
|Silicon Valley Bank||1,137||Cypress Semiconductor Corp||639|
|Barclays Bank||894||Spansion Inc.||566|
|JPMorgan Chase Bank||615||Atmel Corporation||421|
|Royal Bank of Canada||518||Amkor Technology Inc.||415|
|Jefferies Finance LLC||475||Mosaic Technologies Inc.||363|
Since small companies typically have a small number of patents, they may adopt a blanket approach in patent collateralization—that is, collateralize their whole patent portfolios. However, most companies do not need to pool all of their patents to secure a loan. Instead, they need to choose some patents from their portfolios as loan collaterals. Then, how to make the choice? We investigated this question from lenders’ perspective—namely, what kinds of patents tend to be accepted by lenders as loan collaterals? Thinking from lenders’ view is critical for two critical reasons. First, relative to borrowers, lenders face informational disadvantages because borrowers have inside information and thus have a better understanding of the true values of their patents. Second, lenders bear greater risk than borrowers. Note that pledging patents does not exclude borrowers from using the patents so that borrowers may not need to make tough choices. Yet, unlike tangible assets such as plants, machines, and real estate, liquidation of patents can be hard. Lenders will bear losses if the collateralized patents cannot be liquidated in the case of loan defaults.
From lenders’ view, liquidity of patents is key in their decisions since they can recover losses in case of defaults only if they can sell collateralized patents to others. We argued that in assessing patents’ liquidity, lenders need to balance between two types of risk—the risk of patent obsolescence and the risk of unverified external inventions, both of which are related to the ages of prior inventions on which the focal patents are developed. More specifically, if a patent is based upon very old prior inventions (i.e., cite very old patents), it entails the risk of patent obsolescence since the entire invention space surrounding the patent is mature and may become obsolescent soon, reducing the liquidity of the focal patent. On the other hand, however, if a patent is based upon very new prior inventions (i.e., cite very new patents), it raises the risk of unverified external inventions since the implications of extremely new inventions and their potential commercialization values are highly uncertain. Consistent with our arguments, we found that relative to patents based upon very old prior inventions (may become obsolete soon) and patents based upon too new prior inventions (too risky), patents that are based upon moderately new prior inventions are more likely to be collateralized (they balance between these two types of risk).
Of course, who the borrowers are matters too, because lenders’ evaluations of both types of risk can be shaped by the status of the borrowers. We found that if a borrower relies mainly upon internally developed knowledge for innovation, lenders’ concerns on the risk of unverified external inventions get amplified since an internally focused firm lacks the abilities to judge overall technology trends. As a result, lenders become even less likely to accept patents based upon very new prior inventions from an internally focused borrower. In contrast, we found that if a borrower is the invention leader in a technology domain, lenders tend to give it the benefits of doubt and are willing to accept patents based upon very new prior inventions for such a firm.
Yan “Anthea” Zhang (Rice University), Zhuo Chen (American University) and Yuandi Wang (Sichuan University, China)
Zhang, Y.A., Chen, Z., Wang, Y. Which patents to use as loan collateral? The role of newness of patents’ external technology linkage. Forthcoming at Strategic Management Journal.
Available at: https://onlinelibrary.wiley.com/doi/10.1002/smj.3316
Mann, W. (2018). Creditor rights and innovation: Evidence from patent collaterals. Journal of Financial Economics, 130(1), 25–47.